DailyFX.com -
Fundamental Forecast for the Yuan: Neutral
-
How China’s Premier Focasts GDP Ahead of Friday’s Official 1Q Print
-
What Are the Traits of Successful Traders? Get FXCM’s Free New eGuide
This week the onshore Yuan (CNH) extended losses against the US Dollar from the last week, while the onshore Yuan (CNY) closed at a slightly higher value. Over the past week, China released a series of key economic data points that will likely impact the PBOC’s monetary policy in the near future. The probability of PBOC cutting the reserve requirement ratio (RRR) in April has increased significantly. Looking into next week, the economic calendar is relatively light for China and its major counterparts of US and Japan, but it will continue to be important for traders to track central bank governors’ commentary to get clues on the potential RRR cuts.
There are two primary drivers for Chinese authorities to further cut reserve requirements. Chinese economic reports released over the past week have sent out two signals: The economy is exhibiting more signs of slowdown and the CPI grew by less than expected. The 1Q GDP gauge came out at 6.7%, and although the figure met the consensus expectations from both domestic and global financial institutions, it does not change the fact that the economic expansion has dropped to the lowest level since the 2009, the year of the global financial crisis. Also, China’s trade fundamentals are still worrisome despite of the improved March export figure. The 11.5% annual growth in exports in March was largely driven by a low basis level in March 2015 due to a late Lunar New Year last year. The Lunar New Year falls on different days on a Gregorian calendar (the most commonly used) across years. This can be further seen in quarterly data: 1Q exports dropped by 8.2%, the lowest level since 2009. The outlook of trade moving forward remain weak: A leading indicator for China’s trade status, China Import and Export Fair, shows the trade sector still lacking sustainable momentum.
Moreover, the lower-than-expected CPI reading helps to reduce inflation concerns in the near future. This provides a favorable domestic environment for the PBOC to cut the RRR once more. The current 2.3% CPI level leaves room for China’s Central Bank to introduce further easing before the CPI ratio reaches the 3% target. Also, monetary policy in China seems to still be effective. There was wide-ranging criticism towards Central Banks’ overuse of monetary policy, which may have reduced the effectiveness such measures.In February, the New Yuan Loans figure dropped to 726.6 billion yuan from 2510.0 yuan a month ago despite the fact that the central bank cut RRR.However, the March New Yuan loans came out higher than expected and increased 16.1% from a year ago. This indicates Chinese banks start to increase lending to private sectors, which falls in line with PBOC’s purpose to use the monetary policy.